Banks vulnerable to property oversupply: Fitch Ratings

International credit rating agency Fitch has voiced its concern about rising risks in the housing market, fuelled by a flood of foreign buyers and an oversupply of apartments.

Speaking at the rating agency's conference in Sydney, analyst Andrea Jaehne said settlement risks were rising as she tried to predict the impact of oversupply of new properties on the banks, and the broader economy.

"What is going to be the impact on the economy, housing affordability, especially if we consider the percentage of the labour force employed in construction? The problem is here, not somewhere in Western Australia, and the impact on employment could be much bigger than we think."

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Earlier at the conference, senior Fitch manager Ben McCarthy presented mortgage arrears data that speculated the construction sector could become a bigger risk than mining given how many people it employed, and how much of that income serviced home loans. About 8 per cent of the labour force is employed in construction compared to 2 per cent in mining.

Ms Jaehne said when investigating where the demand was coming from for new apartments, she was "a bit shocked" to see a steep increase over five years in approvals to foreigners.

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"Developers only need one approval [for off the plan apartments]. They have to market the property in the local market but often they are selling it off in Singapore, Hong Kong and Shanghai."

She said the agency didn't "have the full picture" as to who was buying these properties.

"People who buy a property off the plan don't need an approval. We compared that to what is coming on to the market and we estimate it's 25 per cent being invested by foreigners," she said.

"Also, how will offshore investors react? Will they be happy to accept no capital gains and no rental income? Are they going to sell and what does it mean if 25 per cent of the new build owners sell and what is the impact on their balance sheets?"

Fitch Ratings has voiced its concern about rising risks in the housing market.

Ms Jaehne presented a chart which showed that about 80,000 housing units would be completed within 12 months in Sydney, Melbourne and Brisbane, about the same number that sold last year. But an additional 125,000 units would be completed within two years.

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​She said an oversupply of apartments, should it eventuate, would impact the asset quality of the banks.

The rise in house prices was a concern, she said, given it had not been matched with rising incomes.

"House prices have gone up – but total income growth hasn't really kept up at the same pace and when you combine this with a low interest rate environment you get an increase in household leverage. That has reached levels that are significantly higher than before."

Mitigating factors

The agency, however, had affirmed the AA minus ratings of the banks and pointed to mitigating factors. Australia is regarded as a strong sovereign, the central bank has full control of its monetary settings, the prudential regulator is seen as strong while the exposures of the banks are manageable.

"What gives us some comfort is that if you look at the exposure for commercial real estate - for the portion of total exposures, one of the banks with the largest exposure has 8 per cent. That is fairly small in an international context."

The fall in interest rates and rise in house prices had also resulted in an "equity buffer" that can be chewed through, before the banks would experience losses, she said.

Furthermore, the simplicity of the banks' business models and the sustainable nature of their profits from low risk lending also made them durable to any adverse impacts.

"The banks have strong market share and pricing power which allows them to operate simple traditional banking models. They generate sustainable incomes through mortgages and to operate relative to international peers, with a lower risk appetite," she said.

"The Australian banks are 'the big building societies – sorry if I hurt someone's feelings – they do loans to households and corporates and they don't have many other assets."